Posts in category: Annuities

CR389

Compulsory life annuity; commutation of monthly income payments

Compulsory life annuity – beneficiaries seeking lump sum payment instead of monthly income payments after death of annuitant before guarantee date  – insurer stating that policy could not be commuted – whether there was any legislative or contractual impediment to payment of lump sum

Background

1. The complainant lodged a complaint on behalf of himself and his three siblings.  Their mother had been the annuitant on a compulsory guaranteed income annuity policy, and they were the beneficiaries.  After the annuitant’s death, the insurer commenced paying the monthly income to the beneficiaries.  They each received about R110 per month, and this was set to continue for the next sixteen years, until the guarantee date.  The beneficiaries felt that this “makes no sense” and they wanted the insurer to pay each of them a commuted lump sum instead.

2. The insurer stated that “the annuity cannot be commuted and we are unable to pay the full lump sum due to the restrictions on this type of policy”. 

3. The insurer quoted a clause in the policy summary which stated:

“If the annuitant dies before the guarantee date, the annuity will be paid to the nominated beneficiaries until the guarantee date, after which the annuity will end”.

4. The insurer also stated that there were other restrictions indicated on the policy document.  The insurer referred to a clause, also in the policy summary, which read:

“Restrictions

This annuity cannot be surrendered, commuted, ceded or pledged.”

Discussion:

5. We pointed out firstly that there was no legislative impediment which prevented the benefit being paid as a lump sum, after the death of an annuitant (who dies before the expiry of the guarantee term).

6. We asked the insurer to provide us with a full copy of the actual policy terms and conditions, not just the policy summary.  The policy terms and conditions would apply if there were any discrepancies between it and the policy summary.

7. The clauses in the actual policy terms and conditions were not the same as in the policy summary on which the insurer was relying.

8. The policy simply stated, under “Beneficiary”:

“The Annuitant may at any time appoint a beneficiary to receive any proceeds that might be due on death of the Annuitant/s if death occurs before the Guarantee Date”,

9. We pointed out that this did not appear to preclude payment of the proceeds in the form of a commuted lump sum (which would of course be subject to tax). 

10. The policy further stated, under “Cession”:

“The Annuitants right to benefit in terms of this policy shall not be capable of surrender, commutation or assignment or of being pledged as security for any loan”. 

11. We pointed out that this applies to the Annuitant, stipulated in the policy by name; it does not apply to beneficiaries.

12. We mentioned to the insurer that in our experience if the contract did not prohibit the payment of a commuted lump sum, other insurers were prepared to offer a discounted lump sum instead of the annuity.  We asked the insurer to reconsider the matter.

Result:

13. The insurer agreed to pay each of the beneficiaries a commuted lump sum.

CR211

Annuities – Complainants alleging that pension increases were inadequate.

Background

The complainants were pensioners who had formerly belonged to an employer pension fund. The fund outsourced its pension liabilities in 1997 by purchasing individual annuities from an insurer for its pensioners, with their agreement. The purchase rate applicable was 5%, a relatively high rate (from a choice of 1% to 6%), providing for a higher initial pension than would have been the case if a lower purchase rate had been selected. [The purchase rate is the percentage of your capital paid as your initial pension.]

Over the past four years the pension increases had been as follows:
2002 4.5%
2003 0.0%
2004 1.5%
2005 3.0%

The complainants believed that these increases were inadequate, and did not do justice to a provision in the annuity policy which states:

“The bonus rate will be determined by [the insurer] taking into account the investment performance of the assets in the bonus pensions portfolio, the need for investment reserves, as well as inflation and the reasonable benefit expectations of all those who receive bonus pensions.”

The insurer advised the complainants that performance had been unsatisfactory over the period in question, but the complainants were of the view that the increases did not take inflation into account and did not meet their reasonable expectations, and that the insurer should accept responsibility for investment decisions taken.

The insurer pointed out another provision in the annuity policy:

“Your pension increases will depend on the difference between the bonus rate declared by [the insurer] and the purchase rate of 5%.”

Thus the pensions were increased annually to the extent that the bonus rate declared by the insurer exceeded the purchase rate. Pension increases would therefore be lower for a purchase rate of 5% than they would be if a lower purchase rate had been selected. In other words lower initial pensions could expect a higher increase from investment returns than higher initial pensions.

Discussion

In evaluating this complaint we noted that it was clear that the insurer must also take further factors, in addition to the purchase rate, into account when determining the bonus rate each year. These are the investment performance of assets, the need for investment reserves, inflation and reasonable benefit expectations of those receiving pensions.

A consideration of the need for investment reserves would entail a consideration of the financial position of the bonus pensions portfolio, which was affected by past investment returns, the mortality experience of pensioners, and the cost of guarantees. While the recent performance of the portfolio had not been good, especially over the market downturn in 2002, there were no grounds for an inference that the insurer had been negligent in the management of the investments, and as no guarantee on pension increases was provided, there was no sense in which the insurer “must accept responsibility for investment decisions taken”. Nor was the insurer required to ensure that increases awarded were in line with inflation. Inflation was simply one of the factors which it must take into account when determining the bonus rate. The insurer must take all the factors mentioned into account and attempt to balance them, and it cannot give undue priority to any one or more factors.

The insurer had provided a table of increases since 1997:

Year Bonus rate Increase Rate of inflation
1997 17.60% 12.0% 9.3%
1998 14.50% 9.0% 6.2%
1999 6.50% 1.4% 9.0%
2000 13.00% 7.6% 2.2%
2001 10.25% 5.0% 7.0%
2002 9.75% 4.5% 4.6%
2003 5.00% 0.0% 12.4%
2004 6.60% 1.5% 0.3%
2005 8.20% 3.0% 3.4%
2006 8.20% 3.0% 3.6%

We noted that the pension increases granted by this particular insurer compared well with increases granted on comparable products provided by other insurers.

Result

We advised the complainants that the insurer’s exercise of its discretion in determining the bonus rate had in our view not been improper or unreasonabe.

SM
May 2007

CR212

Annuities – Complainant contending that his pension increase was inadequate.

Background

The complainant was a pensioner of an employer pension fund, and had been receiving a pension from the fund. In 1998 the fund offered all pensioners the option of purchasing “with profits” annuity policies in their own names from an insurer, and the complainant elected to do so. All the pensioners who made this election thus terminated their membership of the pension fund and transferred their assets to the insurer, a transfer that was approved by the Registrar of Pension Funds in terms of section 14 of the Pension Funds Act. The fund was subsequently liquidated in 1999.

The complainant was very unhappy with the performance of the assets administered by the insurer as translated into the declared annual pension increase on his annuity policy. He stated that the essence of his complaint was the “disappearance” of a guaranteed minimum annual pension increase of 3% which he had enjoyed in terms of the pension fund rules. In his view this liability was transferred from the fund to the insurer.

The insurer pointed out that in terms of the fund rules, on the purchase of an annuity in the name of the pensioner, the fund would have no further liability in respect of each pensioner. His pension increase was thereafter contractually provided for in terms of the with-profits annuity. The fund did not purchase a guaranteed minimum annuity increase from the insurer. The policy required the insurer to determine the increase in annuity, if any, with reference to the bonus declared by the insurer for the participation category applicable to the annuitant, and that such increases, once granted, should not be withdrawn.

Discussion

We noted that the fund had added 10% to the value of the pension transferred to the insurer. This took into account the consequences of the guaranteed 3% increase no longer being applicable to the outsourced pensions. Furthermore, upon liquidation of the fund a further increase of 13 % was granted. These increases of 23% were in addition to other smaller annual pension increases.

The insurer provided an explanation for the manner in which pension increases were related to investment performance, specifically in the pensioner-only asset portfolio in which the assets backing his annuity were invested. In order to meet the guarantee of paying his pension for life, as well as any increase, once granted, for life, the fund had to be prudently managed, with most of the assets invested in bonds to minimise risk, and with smoothed returns. Taking into account a pricing interest rate (purchase rate) of 5.5%, only investment returns over and above this were available for increases. Thus based on an average investment rate of 8%, pension increases of approximately 2.5% could be expected over the long term.

Result

In our view the complainant had received reasonable pension increases over the long term, especially taking into account the additional values on transfer from the fund, and the insurer having complied with its contractual obligations, we could not take the matter any further.

SM
May 2007

CR172

Annuity – time for determination of the amount : at time of death or claim? – procedure – rule 3.4.1

Background

1. The life assured had a living annuity (equity linked annuity) with the insurer. The complainant was the beneficiary on death of the annuitant. No claim was lodged with the insurer at the time of the annuitant’s death on 28 December 1998. According to the complainant the insurer did not query the fact that the annuity was suspended after the death of the annuitant.
2. When enquiries were made on the 28 February 2006, the value of the annuity stood at R113 866,80.
3. Yet when the claim was lodged shortly afterwards the beneficiary was advised that only R42 132,54 was available.
4. The insurer based this value on the value of the annuity at the date of death, not at the date of claim.
5. The complainant claimed the value on the date when the value was advised to him i.e. 28 February 2006.

Insurer’s response

6. The insurer did not initially respond to our enquiry nor to our reminders.
7. In terms of our normal practice we then made a preliminary determination on the documentation on file, in favour of the complainant. The insurer was given fout weeks to challenge our preliminary determination. It failed to do so and the determination became final.
8. Upon notification of the final determination the insurer sent us a response raising, for the first time, the following issues :
• that the amount due on death is the value at the time of death and that this was the amount which should be available for transfer into a new annuity;
• that the insurer was willing to pay interest of R21 672,65 on the amount of R42 132,54.
The insurer did not provide a policy but merely alleged that it provided that the value on date of death was the value payable.

Discussion

9. We advised the insurer that as we had made a final determination and, being functus officio, that we were unable to change it. The only avenue available for recourse was to appeal the decision in terms of our internal appeal process.
10. It is unfortunate when our office has to make a determination without the benefit of “hearing” both sides. However, we cannot delay complaints because insurers do not respond to our enquiries. We allow insurers four weeks to respond to our initial enquiry, after which we send a reminder. If we do not receive a response within a week we send a further reminder advising the insurer of our intention to make a determination within a week. On non-receipt of a response we then make a determination. Our first determination is always in a preliminary form giving both parties a further opportunity to raise fresh points for consideration. There can be no question but that we gave the insurer ample opportunity to respond to the complaint.
11. Apart from the procedural aspects of the complaint, what struck us as unusual was that an insurer would pay the value on date of death and that the benefit of the growth subsequent to death would then fall into the insurer’s hands. On making enquiries at some other insurers and linked investment companies which administer linked annuities, this appeared to be out of line. As matters turned out we were not required to decide the point since the insurer decided not to appeal.

Result

The insurer accepted the determination.

JP
November 2006

CR173
Annuity – purchased with no escalation option – complainant queries non-escalation of monthly income – complainant alleges he was not a party to the agreement

Background

Mr A qualified for early retirement under a retirement annuity due to ill health. One third of the proceeds of the retirement annuity, R18 000, was taken as a cash lump sum and the remaining R36 030,93 was utilised to purchase an annuity. On 1 December 1994 a single life annuity guaranteed for 10 years without an escalation option was effected and provided a monthly income of R509,43. Mr A complained to our office during February 2006 that he was not a party to any agreement that the monthly income should not escalate annually.

Assessment

In response to Mr A’s complaint, the insurer advised that it had no record to prove whether Mr A selected the escalation option on the monthly income. It contended that, in view of the fact that 11 years had elapsed since the annuity was effected, Mr A had ample time to complain about the non-escalation of the monthly annuity income.

The insurer was unable to produce an application form or quotation confirming Mr A’s selection at the commencement date of the annuity on the office’s request. The office expressed its concern to the insurer for its lack of contractual documentation on a policy that was still in force.

Although the insurer could not produce an application form or quotation for the particular policy it nevertheless produced a pro forma quotation reflecting what the total income received would have been had Mr A opted for a 5% escalation at inception. For the period 1 January 1995 until 1 June 2006 the insurer paid an actual, total income of R70 301,34 to Mr A. According to the quotation with the 5% escalation option, Mr A would have received a total income of R70 057,74 for the same period. The insurer indicated that Mr A would therefore have to repay an amount of R243,60 that was overpaid if he now accepted its offer to implement the 5% escalation option from inception. If Mr A accepted the offer, the insurer indicated that his income would increase to R662,95.

Recommendation

The office recommended to Mr A that he should seriously consider accepting the insurer’s offer as it has agreed to place him in the position he would have been in had he requested an escalation from inception. Mr A was, however, not happy with the quantum presumably because of the favourable returns in the South African market at the time.

Result

The office has an internal procedure in place that if a complainant is not satisfied with the provisional ruling of the investigating adjudicator, the matter is reallocated to another adjudicator for a second opinion. This procedure was introduced by the office not only as a measure of reassurance to the complainant but also to ensure consistency inasmuch as the matter would then be reviewed by a “fresh pair of eyes”.

Another adjudicator confirmed that the offer made by the insurer was fair. However, the adjudicator was able to negotiate further with the insurer to waive the amount of R243,60 owed by Mr A. Mr A eventually accepted the insurer’s offer and the annuity was amended from inception with a 5% escalation option.

AR
November 2006

CR118

Retirement annuity policy – surrender of policy on basis of incorrect quotation of surrender value – reasonable reliance

Background

The complainant had a retirement annuity policy with insurer A but because he was unhappy with its performance he decided to transfer the proceeds to insurer B for purchasing an annuity on early retirement. Insurer A calculated the transfer value of the policy and duly advised the complainant of the amount that he would receive. He thereupon completed an application with insurer B for the investment of the amount he was to receive. When the funds were transferred to insurer B, the amount was R23 000 less than quoted. Following enquiries by the complainant and an investigation by both insurers A and B it was determined that insurer A had erroneously calculated the value to be paid and had neglected to advise the complainant of the error before it paid the amount to insurer B.

Discussion

The complainant had been advised by insurer A of the specific amount that was available for reinvestment as an annuity and he had approached insurer B for that purpose. All documentation was completed based on the specific amount which he expected to receive which amount had already included an early retirement penalty. The question arose whether the complainant would have taken early retirement had he known that the amount he was to receive was R23 000 less than he anticipated.

We advised insurer A that we were of the opinion that it had led the complainant to believe that a specific amount was to be paid and that that information could have influenced the complainant to retire early. It is uncertain whether he would have changed his mind had he known the real value of his policy but he was nonetheless deprived of the opportunity to reconsider his position. We suggested that insurer A, as a result of its negligent error and based on the principle of quasi-mutual assent (the reliance theory), consider paying the full amount as originally quoted.

Result

Insurer A paid the complainant the total amount as originally quoted into the annuity policy.

MFBR
October 2005

CR122
Annuity – complainant claiming annual increase in annuity payments

Background

The complainant had been a member of a retirement annuity fund. At his retirement age in 2003 he made a compulsory purchase of an annuity from an insurer, and had been receiving monthly payments since then. He did not receive any annual increase in the amount paid, and on enquiry was advised by the insurer that this was because his contract did not have an annual escalation. However, the complainant had read in the newspaper that the Pension Funds Adjudicator (PFA) had made a decision that “we are now entitled to an annual increase”.

Discussion

The PFA determination to which the complainant referred was the matter of Ngubane v SA Retirement Annuity Fund and Old Mutual. The ruling made it clear that it was only applicable to any person who remained a (pensioner) member of the fund after retirement date, and where the fund continued to be liable for the member’s pension. As the Adjudicator states, “it would have been a different matter if the annuity had been purchased by the complainant in his own name”. Where a person remains a member of the fund, he is entitled to be considered for pension increases as a fund member, in terms of the Pension Funds Act. This is because the Pension Funds Act has now incorporated new minimum benefit provisions to the effect that every fund must, starting on the first valuation date after the introduction of the new provisions, determine a minimum pension increase with regard to a formula provided in the Act.

In the complainant’s case however, his membership of the fund terminated on his transfer to a registered insurer, as was made clear in the rules of his retirement annuity fund. The rules state that all annuities shall be purchased from a registered long-term insurer and any annuity shall be owned by the annuitant. It is further stated that “as soon as an annuity is purchased from a long-term insurer as provided for in 6.4.2 the fund shall be discharged from any further liability whatsoever to the annuitant”.

The complainant was thus the owner of the annuity, and the terms of his annuity policy governed the payment of his annuity and any increases. In his case he had selected an annuity which gave him the highest monthly income possible. The terms of the annuity provided for a level annuity, i.e. the same amount was payable every month and there were no increases. He could have chosen an annuity which included an annual increase but then his income would have been less than the amount he was currently getting per month.

Result

The complainant was advised that he was receiving the correct amount of monthly payment and that he could not expect any annual increase.

SM
April 2006

[vc_row][vc_column][vc_column_text]CR54

Pensioner offered option to purchase an annuity from insurance company – query concerning the commencement date.

Background

The complainant was the executor in the estate of the deceased pensioner. The deceased had been a member of a company pension fund and had retired in 1979. According to the rules of the pension fund his retirement benefits vested in him on that date and the fund had a liability to pay his pension. At the time of his retirement he had the choice of electing a joint pension for himself and his wife, alternatively electing a single life pension payable for a minimum of 10 years even if he should die before the expiry thereof; should he not die within the 10 years it would be payable until his death. He chose the latter. Payment of his pension commenced in 1979 and he remained a pensioner member of the pension fund.

During August 1997 members of the pension fund were given an opportunity, which the deceased took up, to elect an option to have the pension fund purchase an annuity (the bonus pension) in the name of the member from an insurance company. If a member elected this option the pension liability would be transferred from the pension fund to the insurer and the future pension would be paid and guaranteed by the insurer. The agreement between the pension fund and the insurer reflected the effective date of the transfer of liabilities as 1 October 1997. From that date the pensions that were formerly paid by the pension fund were to be paid by the insurer, the pension fund having paid a purchase price to the insurer in order to purchase, in the case of each member who so elected, an annuity of which the member was the owner.

On 2 July 2001 the pensioner died. The monthly pension (annuity) that he had been receiving was discontinued and the complainant as executor in the estate lodged an enquiry with the insurer, querying why the pension did not continue for 10 years from 1 October 1997 to 1 October 2007. The insurer explained that the commencement date of the pension was 1 October 1979, when the deceased had originally become a pensioner. The complainant considered 1 October 1997, when the bonus pension was purchased in the pensioner’s name, as the commencement date. The complainant did not accept the insurer’s explanation and lodged a complaint with our office, maintaining that a new contract had come into being on 1 October 1997. He maintained that the bonus pension certificate issued to the deceased in October 1997 stated that his pension was a single life pension with a term of 10 years.

Discussion

We agreed that a new contract had come into being on 1 October 1997. The key question was what the terms of the new contract were.

In a letter dated August 1997 from the chairman of the pension fund to the pensioners, informing them of the option, it was clearly stated that the general terms and conditions of their pension with the insurer would be identical to those of the pension fund. Certain new terms, such as an increase in pension and a 13th cheque, were to be added. In the deceased pensioner’s case, we were of the opinion that the general terms and conditions of his pension included the term that his single life pension, commencing on retirement date (1 October 1979), would be guaranteed for 10 years.

The contract between the pension fund and the insurer confirmed that the effective date of the transfer of liabilities was 1 October 1997. Our view was that the effective date was simply the date for transfer of the pension liability and not the commencement date for a pension benefit becoming due to a member. Thus the term certain could only be reckoned from the retirement date, which is the date the pension became due to the member.

In coming to the conclusion that the terms of the new contract consisted of the same terms and conditions as the previous pension, plus any new terms, we evaluated all the available documentation, including

• An annexure to the contract between the fund and the insurer, being a schedule of the types of pensions payable to the members, indicated that the deceased was to receive a “Type 01” pension, defined as a single life pension – no mention was made of an outstanding term certain, as the term certain on the original pension vesting in 1979 had ended in 1989, so had expired by 1997.
• The bonus pension certificate received by the deceased after the transfer to the insurer in 1997 admittedly indicated that his pension was a single life pension with a term certain of 10 years. However no commencement date was reflected on the certificate. The commencement date must be interpreted to be the retirement date as this is one of the general terms and conditions of his former pension, and not one of the new terms introduced when the election was put to the members.

Result

We made a ruling that the bonus pension certificate as issued by the insurer was not a contract between the insurer and the deceased pensioner but was merely a certificate issued in terms of the contract between the pension fund and the insurer. The terms of the contract between the deceased pensioner and the insurer, as interpreted from all the available documentation, consisted of the same terms and conditions as the previous pension provided by the pension fund, and therefore there was no liability on the insurer to pay annuity payments after the death of the deceased pensioner. The complainant reluctantly accepted our ruling.

SM
October 2005[/vc_column_text][/vc_column][/vc_row]

[vc_row][vc_column][vc_column_text]CR53

• Annuity – lump sum of some R400 000 invested – nil guarantee – annuity payable monthly in arrears for life – annuitant 57 years of age and in poor health at the time of its conclusion – annuitant dies soon thereafter – alleged misselling.

Background

Mrs A, a childless divorcee, had some R400 000 available for investment. It was destined to be her sole source of income. She sought the advice of a good friend of hers, Mr B, an intermediary associated with company X. They eventually settled on a nil guarantee annuity issued by company X, payable monthly in arrears for life, with a 5% annual escalation. The policy read: “The life assured will receive the annuity amount until death occurs. The contract will cease on the death of the life assured” and “R2090.85 payable on the first due date and monthly thereafter. The final payment will be made on the payment due date immediately prior to the date of death of the annuitant.”

An odd feature of the contract was that Mrs A nominated her two nephews as beneficiaries, which, considering that the annuity would have no residual value, was a contradiction in terms.

Mrs A, sadly, died relatively soon after the conclusion of the contract which meant that the balance of her funds reverted to company X. Her sister-in-law, Mrs C, mother of the two beneficiaries, raised a complaint with company X and eventually with our office. She alleged that Mrs A was, to the knowledge of Mr B, 57 years old and in poor health at the time of the conclusion of the contract; that Mrs A was naïve about financial matters; the fact that she nominated her beneficiaries showed that she wanted the balance of her funds to revert to them; and that she should rather have been sold a life annuity policy with a capital guaranteed period and a return of capital on death.

We asked for a statement from Mr B. He provided copies of the various investment options which were discussed with Mrs A. She was adamant that she wanted to maximise her income. A capital guarantee would have reduced her income stream, although not significantly so. Mr B explained that he happened to be absent on the day Mrs A came in to sign the application form and that the assistant who helped her could not recall why she completed the beneficiary section, other than the forms she filled in were standard ones and that Mrs A must have completed it “as a matter of routine”.

Discussion

This was another of those difficult cases where there was a dispute of fact, exacerbated because only one version could be placed before us, inter alia, as to whether Mrs A was badly advised and truly understood what she agreed to when she signed the application form.

Result

In the result we could not come to a clear conclusion that the probabilities favoured the complainant. We wrote: “The fact that Mrs A did not have financial dependants gives weight to a conclusion that she would have wanted the maximum income and would have been persuaded to purchase a nil guarantee annuity to maximise her income as a concern for financial dependants would not have been a factor. I truly regret that I cannot on the facts on file make a determination in your favour. I realise that it must seem very unfair that the insurer should profit from the untimely death of Mrs A. However, unless there is additional information which would tip the scale in favour of a conclusion that Mrs A could not reasonably have made the choice which was indicated on the application form, I am not able to decide in your favour.”

In the absence of further information the complaint was not upheld.

JP
October 2005[/vc_column_text][/vc_column][/vc_row]